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According Amazon.com executives, free shipping is successful at driving site traffic, bolstering conversion rates and enticing customers to buy more per order.
While it’s been repeatedly proven that free shipping can influence consumer behavior, distribution-related expenses can also become prohibitive. For e-retailers, the primary economic model trade-off is lost shipping and handling revenue (and/or higher shipping costs) vs. additional gross margin dollars. One reason free shipping is economically feasible for select e-retailers is that product prices and, hence, gross margin ratios are higher today. For example, a few years ago, about every product could be purchased for less at Barnes & Noble.com compared to a Barnes & Noble superstore. Today, this is no longer the reality, with mass market paperbacks no longer featuring a discount and bestsellers typically featuring a similar discount online as in stores.
The majority of retailers see free (or reduced) shipping as a temporary promotion, particularly useful during the holidays and other important shopping seasons or special occasions. With regard to Amazon.com’s free super saving promotion, it’s telling that neither partner, Target nor Toys R Us, agreed to participate in the promotion.
Going forward, e-retailers will continue to prominently feature shipping and handling promotions, quite simply because they can quickly impact site traffic and the top line. However, e-retailers will do so with a bottom-line mentality.
In the past 12 months, e-retailing has moved significantly up the profitability continuum. With Amazon.com eking out a small profit and others producing black ink, the industry is well on its way to legitimizing its existence from a profitability perspective. While questions and challenges remain, the channel will solidify its reputation as a profitable distribution channel if players are able to produce the same amount of progress during the coming 12 months compared to the prior.
Geoff Wissman is vice president of Columbus, OH-based consultants Retail Forward. E-Retail Economics - The Next Evolution is an excerpt from “The Ongoing Evolution of E-Retailing,” a Retail Forward Intelligence Program publication. More information about the E-Retail Intelligence Program and this special report is available from Katherine Clarke, 614-437-1021, ext. 109.